From Changing Business Ceos Politics Influences Firms Tax Avoidance

Main navigation Johns Hopkins Legacy Online packages Faculty Directory Experiential studying Career assets Alumni mentoring program Util Nav CTA CTA Breadcrumb From Changing Business: CEOs' Politics Influences Firms' Tax Avoidance The political views of corporate CEOs strongly affect the tax-avoidance methods of the companies they run, and firms led by both Republican-leaning and Democratic-leaning CEOs are associated with significantly extra tax avoidance than firms with CEOs of no obvious political desire, in accordance with a research by a Johns Hopkins Carey Business School assistant professor and three colleagues. Researchers Xian Sun of the Carey School, Bill B. Francis and Qiang Wu of Rensselaer Polytechnic Institute, and Iftekhar Hasan of Fordham University assert in their working paper, “CEO Political Affiliation and Firms’ Tax Avoidance,” that Republican CEOs are associated with considerably more tax avoidance even when their equity-based incentives are low, suggesting that political ideology drives these CEOs’ tax choices. In contrast, Democratic CEOs are associated with larger ranges of tax avoidance beneath certain circumstances however only when their fairness-based mostly incentives are excessive. Moreover, a company’s tax avoidance tends to increase when a Republican occupies the Oval Office, Sun and her colleagues found. The researchers say their study, masking knowledge from 1992 to 2007, is among the many first to provide empirical evidence that the political views of particular person executives have a marked effect on their attitudes towards corporate tax avoidance. The existing analysis literature has proven that particular person CEOs play a serious function in setting their corporations’ tax coverage, though no previous examine in this area has identified components that explain this phenomenon. “It’s a problem of broad financial influence as a result of the financial savings being realized by these massive, asset-heavy firms, while allowed by present tax regulation, may be seen as revenue that isn’t realized by the federal government for public benefit,” says Sun. (She emphasizes that the term “tax avoidance” refers to authorized methods o f lowering tax payments, in distinction to the unlawful actions related to the phrase “tax evasion.”) “Tax avoidance was most prevalent at corporations run by Republican CEOs, but we noticed that companies with Democratic CEOs also looked for ways to chop their taxes, if not on the identical scale,” Sun says. “The companies with Republican CEOs used avoidance measures that ranged from aggressive to less aggressive, including measures that concerned long-term tax avoidance. At the companies with Democratic CEOs, the avoidance methods usually involved guide-to-tax distinction and shelter actions. These are aggressive measures however don’t determine in a firm’s overall level of tax avoidance or in its long-term avoidance technique.” As Sun notes, these findings indicate that CEOs’ political preferences might indeed carry implications for corporate insurance policies and subsequently should be examined extra fastidiously by researchers and others. Sun and her colleagu es moreover found that the affect of individual CEOs’ political opinions on tax-avoidance insurance policies existed nearly totally at “poorly ruled” companies â€" that is, the place the top individual is firmly entrenched, serving as each chief executive and chairman, with a non-impartial board that holds little power. A notable distinction of the Democratic CEOs, Sun says, is that their tax choices are clearly related to economic incentives. “For the Democratic executives, their tax-avoidance policies are explained much less by their political beliefs than by their need to increase their own compensation by bettering the corporate’s bottom line and the performance of its stock,” says Sun. “If there is high potential for compensatory reward, they'll take extra dangers and keep away from more taxes.” What would represent aggressive and dangerous forms of avoidance? According to Sun, they would come with tax shelters and other tools that apparently are legal but may b e extra prone to trigger Internal Revenue Service scrutiny because of their complexity. To decide the CEOs’ political sympathies, the researchers combed via a Federal Election Commission knowledge base for donations made by chief executives at the 1,500 largest public corporations throughout some 50 industries in the United States. Of the CEOs who made political donations to the 2 major events during the 15-12 months sampling interval, about 60 p.c gave to Republicans. In common, the executives made comparatively small contributions â€" an average of zero.03 percent of their annual compensation â€" to one celebration or the opposite, rarely to each. About 200 of the CEOs switched party allegiance during the sampling interval, as indicated by their political donations. Among those who switched to the GOP, their firms subsequently increased their total tax avoidance, while decreased avoidance was seen at companies the place the CEOs switched to the non-Republican facet (Democratic o r no get together preference). Sun presented the paper in October 2013 on the annual assembly of the Financial Management Association, held in Chicago. The FMA is a world, 3,000-member group of academicians and practitioners that promotes the development and dissemination of information about monetary choice making. 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